Do Non-Competes Work Anymore?
Historically, companies have used restrictive covenants, such as non-competition, non-solicitation, and confidentiality agreements, as essential tools to keep key team members from taking your firm’s clients to a competitor or even setting up their own firm. However, many states have made these types of agreements more difficult and in some cases impossible or illegal to enforce. These changes have pushed the question of protecting an organization’s talent, and brand, to the forefront in today’s highly competitive hiring market.
Two of the most valuable assets any company has are its team and its brand. This is especially true in staffing, as there are usually no proprietary products, or no ‘secret sauce,’ only your brand and the goodwill associated with that brand.
What are you doing to protect these key assets? Two factors make this a critical question at this time. One, the greater the value you’re protecting, the more important the needed protections are. “We are at or near all-time highs, in particular in IT staffing firm valuations,” said Martin Borosko, Partner and Staffing Practice Leader with Becker LLC. Second, of course, is the fact that we’re all facing unprecedented tech-talent shortages.
Restrictive Covenants: How Enforceable Are They?
Many companies protect their valuable assets with restrictive covenants such as confidentiality agreements, non-compete agreements, and non-solicitation agreements. Do these documents still work?
Generally speaking, restrictive covenants are enforceable, provided they are “reasonable in time and area, necessary to protect your interests, and not unreasonably burdensome to the employee,” said Chris Leddy, Partner at Becker LLC. Within that generality, however, there are complex factors to consider.
The first is the legislative context in which we operate. Legislation is constantly shifting, so any agreements you use must be reviewed regularly – at least every year or two, certainly – to ensure that they’re still compliant with current laws.
An even more complex consideration, especially in today’s work-from-anywhere environment, is the fact that legislation governing these kinds of agreements varies significantly from state to state. Since the applicable law is generally the one in the employee’s jurisdiction, a company must know the legislation in any state in which they hire employees. “If you’re an Arizona corporation, but you hire an employee in Massachusetts,” Leddy cautions, “you’ll have to be familiar with Massachusetts law.”
There are other differences from state to state as well. Some states – New Jersey, for example – observe the Blue Pencil Doctrine. There, if one portion of an agreement is not enforceable, that section can be struck out by the court without limiting the enforceability of the rest of the agreement. In states that don’t observe this rule – South Carolina, for one – the entire provision can be rendered void if it is ruled unenforceable.
3 Types of Restrictive Covenants and Their Impact on Your Business
The consequences for your business shouldn’t be underestimated. In M&A situations, buyers are asking questions about the steps companies are taking to protect their brand and their talent, making these kinds of protections important for those looking to sell. That said, companies must exercise caution and avoid putting agreements in place that violate state laws. Some states are implementing heavy penalties, including fines and even jail time, in cases where companies require employees to sign agreements that aren’t compliant with legislation.
In short, this legislative landscape can very quickly compound the legal complexity of hiring decisions. With that in mind, let’s look at three types of restrictive covenants, and steps you can take to make them as compliant as possible, to help you protect your company’s assets.
At any given moment, there’s a lot of confidential information flowing throughout your company, to which your employees have access. This can include intellectual property, software, candidate and client information, and business plans and projections. This kind of information, were it to become public, could pose a significant risk to your ability to compete, and therefore should be included in confidentiality agreements.
These covenants help you protect confidential information by prohibiting employees from sharing or using that information, both during their employment and afterward. In crafting a robust program to protect confidential information, there are three keys to consider:
- Access: This is about who has the information. If it is information that is known outside the organization, or if every employee at every level has the information, it lessens the likelihood of it being deemed confidential. Best practices dictate that confidential information should only be available to specific people in a company who need to know the information.
- Acknowledgment: This means that employees should indicate through an agreement that they understand the importance of confidential information. “Employees should know that confidential information can only be used to further the company’s interests, and for no other reason,” Leddy clarifies this further.
- Control: This is about taking steps to manage the dissemination of information. Confidential information shouldn’t be widely available; it should be protected by passwords and other controls, and only accessible to those select people who need it. Borosko notes that companies need to consider the cellphones, laptops, and other devices used by their employees. “A lot of folks these days aren’t in the office where the company owns all the equipment,” he points out, making control more challenging in remote work situations. It should be clear that the company owns the information on the device, and that the employee has no expectation of privacy when using the device. Furthermore, remote work policies should also take this into consideration, making it clear that only the employee may access the device, and should do everything in their power to protect the information on it.
Leddy is unequivocal when it comes to the future of non-competes. “They’re not dead,” he says. “But they’re dying. They’re going away.”
Many states are moving in the direction of making these agreements unenforceable. Some – Illinois, for example – are implementing salary thresholds, disallowing non-competition agreements for employees below a certain salary (to protect lower-wage earners), and waiting periods, only allowing non-competes after employees have been with the company certain period of time.
Where non-competes are enforced, it’s because they’re demonstrated as being necessary in that particular case to protect the business. Therefore, specifics matter.
Craft any agreement uniquely to your business and the employee. Don’t use boilerplate agreements across the board, only use the same for specific employees where it’s truly needed. When describing the scope of the agreement, be specific about aspects like your service niche, or the industry you want to protect. A non-compete with a scope of the staffing industry as a whole, for example, wouldn’t be enforceable in most cases. The broader the scope of the agreement, the less likely it will be to stand up in court.
Courts are more frequently ruling that a non-compete isn’t enforceable especially when a non-solicitation agreement would suffice. The goal of a non-solicitation agreement is to protect a relationship that you’ve invested time, effort, and capital in fostering; a relationship that has value to your business, and that an employee wouldn’t have if not for having worked for you.
Once again, specifics are key. When thinking about employee solicitation, an agreement should specify whether this includes only current employees, or previous employees as well. If the latter, it should be specific about the length of time these former employees are included in the scope. If the agreement is referring to client solicitation, naturally current clients that the employee touched or accessed information about would be included, but what about past clients? Prospective clients?
Defining what solicitation means is also important. A non-hire agreement is very clear: within a certain time period, the subject of the agreement cannot hire an employee away. That agreement, depending on how it was drafted and applicable state law, however, wouldn’t necessarily prohibit the party from remaining in contact with their former colleagues, nurturing and fostering the relationship during the enforcement period.
Protecting Your Technology Staffing Firm
If one of these kinds of restrictive covenants has been broken, what are your next steps?
A first step, and the least expensive, is to send a demand letter to the party in violation of the agreement. This is a relatively ‘friendly’ first move, noting the violation and requesting that it stop. In serious cases, if their new employer is sent a copy of this letter, it can result in that company taking steps to stop the former employee’s actions.
If this fails, there are certain legal avenues available to you. An injunction can lend ‘teeth’ to your request that the agreement is upheld. Suing for damages is also possible in cases where losses can be quantified.
All that said, however, litigation is expensive and can be a waste of time. As a best practice, “don’t spend time enforcing these claims,” Borosko advises. “Take that time, and spend it creating the right policies and covenants instead.” In other words, it’s far more effective to spend the time and effort upfront, crafting effective documents that give employees clear boundaries, and that give you enforceable measures to take if those boundaries are breached.
Protecting your greatest assets is more important than ever. “For staffing firms, their value is in their talent and their brand,” Borosko reiterates. “We don’t have products or a secret formula.” The agreements you use to protect those assets are therefore more critical than ever.
For more details on the changing landscape of non-competes, TechServe Alliance members can access the webinar, Do Non-Competes Work Anymore? Strategies for Responding to States Limiting Enforceability, presented by Borosko and Leddy, through the TechServe Online Learning Center.